Volatility Index and ETPs Review 1/10/2016

The S&P 500 experienced the second worst week in performance since 2011. For those with short memories, the worst week came about four months ago in late August. What both these weeks have in common is China which continues to experience financial market woes and, despite their leader’s best efforts, there seems to be no end to the volatility coming out of that part of the world for the foreseeable future.

The market action pushed all four S&P 500 related volatility indexes higher last week and into a state of backwardation that is often associated with broad concern among equity market participants. It is worth noting that all four are well under the levels reached in August.

In 2015 all the volatility oriented exchange traded products lost value. Both the long and short ones came under pressure due to increased volatility experienced by the futures contracts that these products are designed to track. That was not the case this week as the leveraged longs put up a 50% week, the long funds were up about 23%, and those poor short guys lost about 20%.

The last big trade of the week in VXX options was an interesting one. It appears a trader purchased 10,000 of the VXX Jan 29th20 Puts for 0.29 and sold 20,000 of the VXX Jan 29th 19 Puts for an average of 0.115 (0.23 per spread) for a net cost of 0.06 per spread. The payoff if held to Jan 29th appears below.

Personally I like to receive a credit for such trades so if I am wrong the result is a small profit. In this case VXX in the 20’s results in a loss of 0.06. The best case is a 0.94 gain if VXX closes right at 19.00 and things get hairy below 18.06.

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